Why Do Insurance Companies Use Deductibles?

November 06, 2020 by Dan Green

There are two main reasons why insurance companies put deductibles on their policies.

The first reason is to make sure that people with insurance don’t do dumb things just because they’re insured. This includes leaving a car parked on the street, with keys in plain sight; or, leaving the doors to a home unlocked while away on vacation.

Because there’s a deductible, the person with insurance has “skin in the game” should something go wrong. It’s not just the insurance company that’s paying for the losses and damage; the person who left their car keys in sight, or their doors unlocked, has money at stake, too.

Deductibles keep people from behaving recklessly.

The second reason deductibles exist is to keep people from filing an insurance claim after every low-value loss.

For example, let’s say you’re driving your car and a stray rock bounces up from the road. The rock hits the hood of your car and chips its paint. You don’t like the way the paint chip looks so you take the car to a body shop where they tell you it’ll be $10 to make the repair.

With no deductible on your insurance policy, you’d file a $10 claim with your auto insurance company which would, in turn, do an investigation on your claim (which costs money), process your claim (which costs money), and send you a check for ten dollars (which costs money).

By having deductibles in place, insurance companies can keep their costs down which, in turn, lowers insurance costs for everyone.

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